Michael Lewis on AIG-FP

"I'm convinced that our input into the system led to a substantial portion of the increase in house prices in the US. We facilitated a trillion dollars in mortgages," says one trader. "Just us." Every firm on Wall Street was making fantastic sums of money from this machine, but for the machine to keep on running, the Wall Street firms needed someone to take the risk. When Gene Park informed them that AIG-FP would no longer do so - Hello, my name is Gene Park and I'm closing down your business - he became the most hated man on Wall Street. The big Wall Street firms solved the problem by taking the risk themselves. The hundreds of billions of dollars of sub-prime losses suffered by Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns, and the others were hundreds of billions of dollars of losses that might otherwise have been suffered by AIG-FP.

What no-one realised is that Joe Cassano, in exchange for the privilege of selling credit default swaps to Goldman Sachs, Merrill Lynch and all the rest, had agreed to a change in the traditional terms of trading between AIG and Wall Street. In the beginning AIG had required its counter-parties simply to accept its AAA credit: it refused to post collateral. But in the case of the sub-prime mortgage credit default swaps, Cassano had agreed to several triggers, including AIG losing its AAA rating, that would require the firm to post collateral. The subsequent race by the big Wall Street banks to obtain billions in collateral from AIG was an upmarket version of a run on a bank. AIG couldn't afford to pay off Goldman Sachs in MArch 2008. But that was okay. The US Treasury, led by the former head of Goldman Sachs, Hank Paulson, agreed to make good on AIG's gambling debts. One hundred cents on the dollar.

Martin Wolf on Mervyn King versus the Government

"One of the results of this crisis is to imperil central bank independence, not just in the UK. This is so for three reasons: at close to zero official interest rates, the boundary between monetary and fiscal policy erodes; governments are running huge fiscal deficits, particularly in the UK and the US, which threaten monetary stability; and, finally, those in charge wish to divert blame for the disaster.

"Mr King has made four points, all critical of the government: first, contrary to the views of the Treasury, “if banks are thought too big to fail, then . . . they are too big”; second, the Bank of England has “a new statutory authority for financial stability ... [But] it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials”; third, he has not been consulted on the forthcoming financial services white paper; and, last, as he told the Commons Treasury committee: “If the economy were to recover along the path assumed in the Budget projections of GDP then I think the time over which deficits need to be reduced is likely to have to be faster than was implied by [the Budget] projection.”

"Let us start with a simple question: is the governor correct on the substance? The answers are: yes, yes, yes and yes.

"True, the politicisation of the independent central bank is potentially very dangerous. The Bank’s still-limited independence may be compromised or even overturned. Moreover, at a time when co-operation among the authorities is essential, the appearance of disarray is itself damaging to confidence. Yet, against these powerful considerations, a responsible public official has to decide whether a particular issue has become so important that bringing his views into the open has become the only patriotic thing to do.